How To Beat Most Active Managers: A Performance
Analysis of Fundamental Indexation With Different Price Ratios – Greenbackd

Most investors, pro’s included, can’t beat the
index. Therefore, buying an index fund is better than messing it up yourself or
getting an active manager to mess it up for you. If you’re going to buy an
index, you might as well buy the best one.

I noted the unusual fact that the dividend
yield on the S&P 500 then exceeded the yield-to-maturity on the ten-year US Treasury note as it
does now. This hadn’t happened in earnest since the 1950s. The question is why?

To me, the value of a relatively low-risk
investment like a minimum volatility portfolio is not its low risk, but how its
returns can compare with those of a capitalization-weighted equity portfolio,
or a so-called market portfolio.

I followed up with this comment and googled
around a bit to find articles on the subject. As expected, there is a belief
that cash-adjusted P/E ratios are important for stock performance. This
certainly seems like a reasonable idea.

Schwab has issued the results of an interesting
new survey examining the views of high net worth investors (those with at least
$1 million in investable assets) and their advisors. Some particularly
noteworthy findings follow. Note the
frequent disconnect between advisors and their clients.

People who are happy are more confident and
expect to make more money by trading, and anticipate taking lower risks in
doing so. This result ought to be enough to depress most people, but most
people are optimistic and don’t depress easily. This is especially true if they
make money on their random trades, because that makes them happier, more
optimistic and more prone to trading.

Chris Stucchio, a high-frequency trader, argues
that the sub-penny rule, SEC Rule 612, “essentially acts as a price floor on liquidity – it is
illegal to sell liquidity at a price lower than $0.01.” As a result, traders
compete on speed (latency) rather than on price.

Long before even some of the largest financial
services firms put sophisticated risk mitigation programs into place, Peter
Bernard, chief risk officer of the D.E. Shaw group, was blazing a trail at his
firm with an innovative approach to analyzing what can go wrong.

Ted Parmigiani, an analyst at the former Lehman
Brothers, spent two and a half years giving the S.E.C. information about what
he contended was insider trading at the firm. But the S.E.C. ultimately decided
against filing a case.

Sandor talked about what makes for a “good
derivative.” As befits his key role in
the development of financial futures, his answer was straightforward: “Transparent, regulated, and centrally
cleared.” And bad ones are “opaque,
unregulated, and have insufficient capital” backing them up.

The assumption is that the global financial
markets are there to serve capital, not people (if it benefits people, fine,
but that is after the fact). It is conceived as a giant piece of machinery
whose behaviour can be successfully interpreted by those clever enough. Of
course, it is an illusion. The machinery is impelled by people trying to
interpret the machinery; that is why forecasts and predictions have such a poor
track record.

The Upper Tribunal has directed the Financial
Services Authority (FSA) to fine ex-UBS professionals Sachin Karpe £1.25m
and Laila Karan £75,000 and ban them both from performing any role in regulated
financial services for failing to act with integrity and for not being fit and
proper persons.

Robert J. Shiller: Beyond compensation, the next generation of finance professionals will
be paid its truest rewards in the satisfaction that comes with the gains made
in democratizing finance – extending its benefits into corners of society where
they are most needed.

The Whiskey Breath of Wall Street: What the
Invention of Bourbon Has to Do With Credit Derivatives – Minyanville

Book
review: Sir John Templeton was one of the
most successful fund managers of the twentieth century. At his peak, during the
two decades after his move from New York to the Bahamas in the late 1960s, he outperformed the market by 6% per annum. Over his
career he outperformed by 3.7% per annum.

The op-ed heard round the world—Greg Smith’s
scathing New York Times attack on Goldman Sachs, his employer of nearly 12
years—dealt another blow to the firm’s reeling reputation. Now the questions
are louder than ever: Will C.E.O. Lloyd Blankfein have to go? Who might succeed
him? And does it matter?